Putting money into an ISA and then drawing an income from it every year is one way to turn a smart move today into a rewarding one for the future.
If I had a spare £12,000 to invest in my Stocks and Shares ISA right now, I think I could target an annual dividend income of £1,000.
Here is how I would go about it.
Investment principles
When investing in a Stocks and Shares ISA, I apply the same principles I do more generally.
I would diversify across a number of shares to reduce my risks if any one of them turns out to be less rewarding than I expect. £12,000 would comfortably let me spread my ISA across five or six different companies, in equal amounts.
My focus would be on buying what I think are excellent businesses at attractive prices. An £1,000 annual income from £12,000 implies an average yield of 8.3%. That is higher than most shares offer. But I would actively seek to avoid falling into value traps by chasing yield. Instead, I would stick to buying shares in high quality companies.
Building a portfolio
Fortunately, in the current market I can see candidates for my Stocks and Shares ISA that match that description – and deliver my target level of yield.
British American Tobacco is an example and indeed its current yield is exactly 8.3%.
I like the company’s massive cash flows and premium brand portfolio. Declining cigarette usage is a risk to sales and profits but, for now, the market remains vast and the firm is quickly growing its non-cigarette business.
Like British American, I already own financial services firm M&G in my portfolio. It has a large customer base, strong brand and vast potential market. On top of that, it yields 9.7%.
Can the dividend last? Dividends are never guaranteed and M&G does face risks, such as turbulent markets hurting investment returns. But it raised its annual dividend by 6% this year, which I take as a sign of management confidence.
Hitting the goal
With a share like M&G yielding more than my target, I could still meet my 8.3% average yield goal by investing in some shares that yield a bit less.
As well as individual companies, I would also consider some investment funds. The Income and Growth venture capital trust yields 10.9%, for example. Henderson Far East Income offers 9.6%.
Investing in funds rather than just individual companies could help me further improve the diversification of my Stocks and Shares ISA. But I would consider the fund investment strategy carefully and weigh up its long-term prospects. Whether through a fund or directly, I am aiming to invest in high-quality, attractively-priced businesses.
Four-figure income
In the current market, I think I can realistically aim to generate £1,000 annually from my Stocks and Shares ISA as passive income, by investing £12,000 today.
If I buy good shares hopefully, over time, their dividends may grow – and earn me even more each year.
